Tuesday, October 21, 2008

Stocks Sharply Lower into Final Hour on Global Growth and Earnings Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer longs and Internet longs. I added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising .3% and is still very elevated at 53.23. The ISE Sentiment Index is below average at 134.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running high most of the day, hitting 1.47 at its intraday peak, and is currently 1.44. The Euro Financial Sector Credit Default Swap Index is falling 2.36% today to 97.0 basis points. This index is up from a low of 52.66 on May 5th, but down significantly from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling 3.0% to 189.24 basis points. The TED spread is plunging another 8.2% to 273 basis points. The TED spread is now down 190 basis points in less than two weeks. The 2-year swap spread is rising 2.18% to 104.25 basis points. The Libor-OIS spread is dropping 5.18% to 277 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 2basis points to 1.11%, which is down 152 basis points in under four months and at the lowest level since April 1999. Another meaningful decline in gauges of credit angst is a large positive for the broad market. However, the action in technology shares is a negative considering how much bad news should already be factored into shares at current levels. I suspect (AAPL) will beat estimates slightly and be very conservative with guidance. I would expect an initial further sell-off in the shares followed by a rebound by tomorrow’s close. I plan to add to my long position on any further meaningful decline in the share price from current levels. Nikkei futures indicate a -280 open in Japan and DAX futures indicate a -40 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit angst and bargain-hunting.

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